How Dark Money Works

A demonstrator holds a sign outside the U.S. Chamber of Commerce during a rally against the Supreme Court's decision in favor of Citizens United, which allows private citizens and corporations to make unlimited donations for political campaigns.

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The year was 1988. That fall Vice President George Bush Sr. was battling Massachusetts Gov. Michael Dukakis for the U.S. presidency. Dukakis was doing well. He had a strong economic record in the form of the so-called "Massachusetts Miracle" of the 1980s.

Then on Sept. 21, an ad called "Weekend Passes" began appearing on televisions across the country. It stated that while George Bush supported the death penalty, Dukakis not only opposed it, he also supported weekend furloughs for convicted murderers. This was actually a policy Dukakis inherited from his Republican predecessor and one that the governor also ended. But the ad told a simple and devastating story about a convicted murderer named Willie Horton who, on one of these "weekend passes," stabbed a man repeatedly and raped his girlfriend.

The ad, later seen as a crucial turning point in the campaign, marked the beginning of the end for Dukakis's presidential bid. Many viewed "Weekend Passes" as a particularly virulent form of negative advertising and "dirty tricks" campaigning. It came under intense criticism for, among other things, allegedly exploiting racist attitudes toward African-American criminals. The Bush campaign, however, was able to officially disavow the ad since it was funded by an outside group called the National Security Political Action Committee (NSPAC). The NSPAC, headed by former Joint Chiefs of Staff Chairman Thomas Moorer, supported Bush's campaign without being formally linked to it [source: Kamber].

Fast forward to the election season of 2012. Sal Pace, a Democratic candidate for the Colorado House of Representatives, is quietly sitting in a pew at a Catholic church in his home county of Pueblo when a 10-year-old girl approaches him and asks whether he's really trying to cut her grandmother's Medicare. The heavy cuts to Medicare actually had bipartisan support and had no direct effect on patients' care, but Democrats around the country were getting the blame thanks to a barrage of TV ads.

Americans for Tax Reform, the organization funding the ads, was designated as a nonprofit — unlike a political action committee (PAC). That means it wasn't legally required to disclose its donor list [source: Scherer]. And because the funds used in those political ads had anonymous sources, they're known as "dark money."

501(c)(what?)

The Underwood Tariff Act, named for the pleasant-looking Sen. Oscar Underwood, re-instated the federal income tax.

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Sure, dark money has a cool name, but what about its backstory? To boil it down, dark money is the result of a convergence between a seemingly innocuous tax statute and a deeply divisive Supreme Court ruling. Sensational stuff? In its own way, yes. Let's start with the tax status.

Back in 1913, the U.S. Congress enacted the so-called "Underwood Tariff Act" (aka the Revenue Act of 1913). That's the one in which the feds reintroduced income tax. Included in the act were a bunch of exemptions, one of which was for nonprofit groups [source: Gershman]. It's generally thought that the U.S. Chamber of Commerce was behind this statute, which would make sense because the Chamber just happens to be a nonprofit. This exemption included in the 1913 Act is considered the forerunner to 501(c)(4) designation, but it's unclear exactly when that precise nomenclature appeared. The 501(c)(4) designation refers to two different types of nonprofits: "social welfare organizations" and "local associations of employees" [source: IRS].

By 1959, the government had accepted the idea that these organizations could be involved in politics and had codified them as "action organizations." By 1981 the rules were further loosened with the result that such a group could be politically engaged and still retain 501(c)(4) status if it limited its engagement to the promotion of "social welfare." It doesn't take a tax accountant to see that this kind of language is a slope waiting to be slipped down [source: Gershman].

Indeed, 501(c)(4) has always been slippery, but the slope it established turned out to be the setting for an avalanche.

On to part two: In 2010, the Supreme Court handed down a ruling in the case of "Citizens United v. the Federal Election Commission." In a nutshell, the ruling defined corporations and unions as individuals and spending as a form of free speech. Since the free speech of individuals is protected by the First Amendment, the ruling meant that corporations are allowed to spend as much as they want when it comes to political campaigns. While direct contributions to candidates remain limited, contributions to the PACs that support them are completely unlimited. PACs, however, are inconveniently obliged to disclose the names of their donors [source: Levy].

Say you want to help create an ad that viciously attacks a candidate. Maybe, to up the ante, you wouldn't be averse to spreading a little misinformation. This kind of thing looks bad if it can be traced back to you and your associates. That's where dark money comes in. By shoveling funds into a nonprofit "social welfare" organization with 501(c)(4) status, you can avoid all that. Your donation remains anonymous, and the organization can fund away without any fear of blowback. In fact, the 501(c)(4) organization can even donate your funds to a PAC. When the PAC discloses its sources, all that pops up is the name of the nonprofit. You and yours stay safely hidden behind the dark money curtain, and, best of all, you can give as much as you want.

So while the 501(c)(4) designation has been around for decades, the Citizens United decision made it deeply relevant to American politics.

The Dark Side

Charles Koch -- who, along with his brother David, makes up one half of the wealthy "Koch brothers" -- is the billionaire CEO of Koch Industries.

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In the lead-up to the Iowa and New Hampshire primaries of 2016, the national environmental nonprofit Friends of the Earth Action aired a TV ad praising Democratic candidate Bernie Sanders for his record on issues such as the Keystone XL pipeline. As a "social welfare" organization, Friends of the Earth Action is classed as a 501(c)(4) and is therefore not required to disclose its donor list. Critics, notably from Hilary Clinton's campaign, have accused Friends of the Earth Action of being a dark money outfit. Friends of the Earth Action has countered by promising to release the names of all donors who have contributed more than $200.

Other left-of-center nonprofits are also politically active. Examples include the League of Conservation Voters, Patriot Majority USA and Planned Parenthood. In the 2012 election cycle, for instance, Patriot Majority USA received more than $2 million from labor unions. In all, the group raised enough anonymously donated funds to funnel more than $7 million into campaigns for the presidency, the Senate and the House [source: Blumenthal].

But while liberals make use of the dark money loophole, they can't match conservatives for sheer volume. During the same 2012 election cycle, 83 percent of anonymous spending was deployed against Democrats [source: Scherer]. Founded by billionaire conservative activists the Koch brothers, Americans for Prosperity was a big spender ($36 million), as was Crossroads GPS ($71 million), the organization created by Karl Rove, George W. Bush's former chief political strategist. The U.S. Chamber of Commerce was no slouch either ($35 million). Remember them from that little statute in the Underwood Tariff Act of 1913? They were really thinking ahead!

But those numbers will likely be dwarfed in short order. As of November 2015, the amount of dark money spent in the run-up to the 2016 election was already more than 10 times the amount spent during the same period in the previous election. During the 2012 cycle, the dark money tally topped out at $308 million [source: Kertscher]. So if things keep up, the anonymous spending total for the 2016 election could number in the billions.

Who Cares?

It's doubtful Thomas Paine had dark money in mind when he was brainstorming "Common Sense."

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In the 2012 campaign cycle, almost 9 of every 10 ads funded by dark money were negative and the Annenberg Public Policy Center determined that 26 percent of them were misleading. Ads paid for by organizations that disclose their donor lists were often deceptive too, but at a slightly lower rate than dark money spots [source: Scherer].

So does dark money threaten to corrupt U.S. politics? There's been a lot of hand wringing about dark money, especially from the left. One could easily argue that liberals are just mad because they're getting seriously outspent. But is there any merit to the concerns that have been raised?

The general argument goes something like this: Big money has a significant influence on politicians. If those proffering the big money are not required to disclose their identities, then their influence is potent but secretive. In other words, the general public has no way of knowing who helped get a politician elected nor what they want in return for their generosity.

Others have argued that there is no linear relationship between the amount of money raised and a successful campaign. Many candidates have raised massive sums of money only to drop out of primaries or ultimately lose an election. In recent memory, Texas Sen. Phil Gramm, former New York City Mayor Rudolph Giuliani and former Vermont Gov. Howard Dean all spent many millions before dropping out of presidential primary races [source: Dubner].

If money doesn't guarantee a win, it's tempting to ask why not simply ban campaign contributions altogether? The general answer is that political campaigns are expensive — when you need to reach hundreds of millions of potential voters, you need major funds to get your message out.

Those who oppose dark money aren't necessarily against campaign financing; they're arguing for transparency. Actually, in its controversial Citizens United ruling, the Supreme Court agreed, writing, "transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages." It would seem that dark money wasn't an intended consequence of the ruling [source: Beckel].

But not everybody agrees. Pointing out that Thomas Paine's "Common Sense," in addition to "The Federalist Papers," were first published anonymously, some have argued that anonymity is a vital part of speaking truth to power and that transparency could put a chill on free speech. If donors are required to disclose their identities, they might fear a backlash [source: Beckel]. Of course, this argument presupposes that speech can be equated with money, which is itself the contested notion at the core of the Citizens United decision. Is writing an anonymous check for millions of dollars the same as keeping your name off the byline of a political manifesto? Not exactly, but it takes money to disseminate the manifesto, and in that sense some might argue that money and speech are, if not synonymous, closely linked.

Still, the First Amendment guarantees the right to free speech, not the right to broadcast it to the widest possible audience. It seems hard to get around the fact that if nothing is done about dark money, those with the deepest pockets will have more secretive influence than those who don't. Is that a problem? If your answer to that is "no, that's the way the world works," then dark money probably doesn't really bother you. If it's "yes," read on to find out what's being done to curb dark money spending.

Lighting the Dark

Members of the so-called Tea Party were none too pleased when the IRS admitted it was looking particularly closely at their political groups and donations.

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In 2013, campaign finance reform activists and consumer advocate groups proposed that the Securities and Exchange Commission (SEC) should force corporations to inform shareholders of their donations to political and nonprofit organizations. The proposal received an unprecedented 600,000 comments from the public, the majority in favor of it. If enacted, the proposal would mirror a similar rule that requires labor unions to disclose their contributions to politicians, political groups and nonprofits. However, without comment, the SEC dropped the proposal from its 2014 agenda [source: Blumenthal].

Organizations with 501(c)(4) status aren't supposed to be able to empty their coffers into campaigns. There's actually a rule that says they're not allowed to use more than half their resources to fund political activities. The problem is, that rule is really hard to enforce. The Internal Revenue Service decided to give enforcement a go, but they got their knuckles seriously rapped by Congressional Republicans as a result. They were accused of partisan targeting of conservative nonprofits. While a Department of Justice inquiry found no criminal wrongdoing, the chastened agency was reprimanded for "poor judgment" [source: Watson].

In 2013 a Treasury Inspector General report suggested that the IRS elucidate its rules about what constitutes political activity in order to shed some light on dark money. But when the agency tried to do so, congressional Republicans blocked the effort in a rider attached to an omnibus spending bill in December 2015 [source: Watson]. Another rider in the same bill prevented the SEC from forcing corporations to reveal their donations to shareholders [source: O'Donnell].

Individual shareholders have been submitting private requests for information about political contributions to large public companies, and in some cases, the corporations have voluntarily obliged. With all efforts to get the government to police dark money so far stymied, perhaps this is the way forward for now [source: O'Donnell].

One argument that shareholders might use is that too much in the way of campaign contributions and political lobbying can be bad for business. When companies seek political favors, they engage in a behavior known as rent-seeking. In a nutshell, this means they're trying to get a piece of the existing pie rather than concentrating on making the pie bigger or making other pies (i.e., creating wealth). If rent-seeking turns out to be a successful strategy for companies in general, and nobody's creating wealth, this could result in a stagnating economy [source: Craig and Madland]. Shedding some light on the sources of dark money might help prevent that gloomy fate.

Author's Note: How Dark Money Works

I've got a great way to put a stop to all this partisan whatnot — let's go back to the source: Athenian democracy. Ancient Athenians used a system called sortition to select government officers. Basically this meant that all citizens over 30 could put their names forward for selection from a lottery machine. Government by lottery! No more campaigns, no more campaign contributions and no more dark money. The only risk would be that your Aunt Hilda could end up being President. But is that really so bad?

More Great Links

Sources

Beckel, Michael. "What Is Political 'Dark Money' — And Is It Bad?" The Center for Public Integrity. Jan. 20, 2016. (Feb. 11, 2016) http://www.publicintegrity.org/2016/01/20/19156/what-political-dark-money-and-it-bad

Craig, John and David Madland. "How Campaign Contributions and Lobbying Can Lead to Inefficient Economic Policy." Center for American Progress. May 2, 2014. (Feb. 11, 2016) https://www.americanprogress.org/issues/economy/report/2014/05/02/88917/how-campaign-contributions-and-lobbying-can-lead-to-inefficient-economic-policy/